Mayday call just a memory as Alan Joyce pilots Qantas to brighter future

AIRLINE chief Alan Joyce is all smiles after a huge earnings upgrade for Qantas.

Alan Joyce, former chief executive James Strong’s widow Jeanne-Claude and former assistant Deanne Craig as a new plane arrives. Picture: Cameron Richardson

AS the cameras clicked away in the Qantas hanger at Sydney Airport on the early afternoon of November 19, Alan Joyce gritted his teeth. By his side were the two most important women in the life of the airline’s celebrated former chief executive, James Strong, who passed away last year.

Strong’s long-serving personal assistant, Dianne Craig, openly wept as a brand new Boeing 737 painted in the airline’s retro livery from the 1970s and bearing Strong’s name was given a traditional water cannon salute after a two-day journey from Seattle.

Strong’s widow Jeanne-Claude shed a tear as she waved the aircraft a warm but sombre welcome. Joyce stood stoically in silence, but behind his glasses, his eyes were glassy and red. While the cameras didn’t quite capture it, he also shed a tear.

In that moment Joyce may have reflected once again on the responsibility entrusted to him almost six years to the day when the Qantas board made him the youngest ever chief executive of the airline.

It might have reminded him that piloting Qantas is unlike any other CEO job in the country. Everyone has a view about the national carrier and they will tell you about it. And over the past year, plenty have been calling for his head, declaring that the diminutive Irishman and his team have been killing an Aussie icon.

But Joyce, backed by his strongman chairman Leigh Clifford and the board, has survived.

“Alan has been subject to a lot of unfair criticism. He’s always had my full support, and that of the board,’’ Clifford tells The Weekend Australian.

“There was a clear understanding by the board about the magnitude of the task Qantas faced, and the need for a quantum leap in reducing the costs of running the business.

“We knew there would be controversy given the scope and speed of the transformation program.’’

As Joyce stood in the hangar that day to salute his famed predecessor, there would also have been a sense of vindication: that the Qantas James Strong piloted through privatisation and a merger with Australian Airlines to become one of the most profitable airlines in the world was back on course after heading for a crash landing.

On Monday, the airline issued one of the biggest profit upgrades in its history.

And Joyce and his hands-on chairman were all smiles. Clifford says the “results we’re seeing clearly justify’’ the confidence the board had in Joyce in their darkest moments over the past three years.

Qantas shares took off after the airline revealed the surprise news that the success of its cost-cutting drive would mean that underlying first-half profit would be as much as $350 million, $100m more than the most optimistic forecast.

“This is a cyclical business and while the early signs are good, we’re absolutely determined to meet the $2 billion (cost-cutting) target we’ve set out,’’ Clifford says.

And Joyce had a not so subtle message for his chairman, staking his claim to finish the job, declaring — perhaps with a tongue-in-cheek dig at his older rival at Virgin, John Borghetti: “I was ­appointed at my relatively young age, because they wanted me to have a long tenure and nothing’s changed on that.’’

Ten years, he declared, was the average tenure of a Qantas chief executive.

“I think if you look at the companies like GE and Wesfarmers, they’ve been very consistent that that long tenure for CEO, it actually does generate the ability to complete programs and transformations like this,” Joyce said.

“So certainly with the company turning the (way it is) — I’m very confident and sure that my tenure, as long as the board and the shareholders are comfortable with what I’m doing, will continue.’’

It was a far cry from six months ago, when a solemn Joyce barely flinched as he coldly announced a $2.8bn bottom-line loss and weathered another storm of criticism from the government, the Labor Party and the union movement for his cost-cutting program and his bid for government support for the airline.

Borghetti noted tellingly at the time, without naming his competitor directly, that “slash-and-burn tactics only harm the product and the service you ­deliver’’.

One long-time industry observer claimed this week that Qantas’s bid for a debt guarantee last year while parliament considered lifting some of the legislative restrictions on the airline now looked like a try-on.

“It is a bit cute to say this week that the improved profits are the result of a plan when you are going to the government a year earlier saying we will go out of business if you don’t help us,’’ the observer said.

“I think they over-egged it a bit last year.

“But you never miss a flood when there is an emergency.’’

Certainly, the airline’s ability in June to raise some $750m in long-term funds on the Australian-­dollar unsecured market confirmed there was no need for panic and made something of a mockery of the plea last year for government support.

But Joyce stresses the dialogue with the government was all about having a level playing field against a rival like Virgin, which is backed by four powerful foreign shareholders — Singapore Airlines, Etihad, Air New Zealand and Richard Branson’s Virgin Group.

“We very clearly had restrictions on us through the Qantas Sale Act that no other carrier had in Australia or internationally,” Joyce says. “We said that needed to be fixed.’’

In July, parliament passed important changes to the Act that ­allowed an expansion from ownership limits on the airline of 25 per cent for individual investors and 35 per cent for a foreign-owned airline.

But under a deal between the Coalition and Labor, foreign-ownership limits for individuals and foreign airlines remained limited to 49 per cent.

“I don’t think you can say losing $2.8bn was crying wolf. That was a significant loss and a significant problem for the business,’’ Joyce says.

“What’s made the difference is we have persevered and with determination implemented one of the biggest transformation programs in, I think, any company in Australia and the turnaround has been quite rapid as a consequence of that.’’

It is important to remember that Joyce’s profit boast was also helped by a reduction in annual depreciation charges of $200m after Qantas booked a writedown of $2.6bn on the airline’s international fleet.

That came after the passage of the Qantas Sale Act reforms and a move to separate its international operations into a new entity.

But the man himself even admitted this week that the Qantas executive team were surprised as they watched the headwinds battering the airline turn into tailwinds over the past six months as crude oil prices fell and the competitive climate became more ­benign.

While Qantas said the benefits of the reduction in fuel prices would only provide a $30m windfall in the first half, some analysts believe it could yet be more than $50m.

Qantas has seen seven months of yield improvements on its international business as the lower Australian dollar has hurt its ­inbound rivals, leading to big ­capacity reductions.

There has also been two months of yield improvements ­domestically following the end of the brutal capacity war of the past three years with Virgin.

It prompted a big mea culpa this week from Morgan Stanley analyst Nicholas Markiewicz.

“In the last six months Qantas has shown capacity discipline, a yield recovery, a weakened competitor, cost-out and fuel upside — all of which we failed to fully appreciate,’’ Markiewicz told clients.

“In short, we got it wrong.’’

Debate continues as to who blinked first in the domestic capacity war and the facts are that Joyce engaged in great self-harm by fighting to maintain Qantas’s share of the domestic market at 65 per cent — the infamous “line in the sand’’.

But the bottom line is that Joyce has always believed there was good money to be made at home by both Qantas and Virgin.

“I think everybody can make money in the domestic market going forward because, I think, that has been the case in the past,’’ he has said.

Joyce believes his transformation plan will deliver more than $650m in savings this financial year and analysts such as Citi’s Anthony Moulder are now forecasting a full-year underlying profit before tax of $760.5m.

Questions remain about the number of restructuring one-offs that may yet plague the statutory bottom-line interim and annual results, which will govern the payment of dividends.

One fund manager that holds Qantas shares commented that the “list will be as long as your arm’’.

And unions continue to claim the cuts are undermining Qantas’s hard-fought reputation as the safest airline in the world.

After a fresh string of safety issues this week, TWU national secretary Tony Sheldon said major changes at Qantas involving cuts to the workforce and outsourcing of staff were having an effect and maintenance standards had dropped. “This is an airline with a great reputation but the decision to strip back its highly experienced workforce has lowered standards,’’ Sheldon said. Joyce vehemently denies this.

But all this hasn’t mattered to the sharemarket, which has ­pushed Qantas shares up more than $1 since mid-October to ­levels not seen for four years.

On Monday alone they rose 14 per cent.

And the improving share price has not only been important to the airline’s external investors. It has also been vital for staff — many of which also hold shares — that have been battered and bruised by years of cost-cutting.

And Joyce knows it.

“Having to make people redundant, pulling off routes — it’s bloody hard. It’s not the thing that you want to do,’’ he has said.

Clifford, a veteran of slashing staff and smashing unions in the Pilbara during his reign at Rio Tinto, also shows some compassion.

“I really feel for the people who lost their jobs. But making the company more sustainable helps to safeguard the tens of thousands of jobs that remain,’’ Clifford says.

“Everyone at Qantas has been absolutely superb in the way they’ve put their shoulders to the wheel to deliver on trans­formation.’’

Joyce reckons that when Qantas executives showed staff at their Sydney HQ the airline’s new “Feels Like Home” commercial last, ‘‘half the audience was crying”, highlighting their loyalty to and love of the brand.

Tellingly, the ad ditches the airline’s “I Still Call Australia Home” anthem, with its Spirit of Australia positioning. Instead it is set to the Randy Newman song Feels Like Home, sung by 20-year-old Sydney performer Martha Marlow, and has been well received by the public.

When Joyce flew to Brisbane this week for the launch of the airline’s new Japan services, staff in the terminal and in the maintenance hangar remarked about the share price and how it had recovered. The latter were even following the price on their phones.

“We met a lot of staff in Brisbane, a few pilots as well, and they were saying ‘this is phenomenal news — we didn’t think we’d get there that fast’,’’ he says.

“The engineers outside — they’re all saying ‘isn’t that phenomenal with the share price’. To them that’s a huge signal that the business is being regarded as healthy and as turning the corner.’’

Joyce went on to say that he was surprised how many of the frontline staff had bought the stock at 96c.

He also quipped that senator Nick Xenophon, who bought a parcel of shares so he could attend the airline’s AGM last month, had made “the best investment I think he’s ever had in his life … $500 which is probably worth now near $1000. I think he’s probably doubled his money,’’ Joyce says with a wide smile. In the Qantas bunker at its Mascot head office, Joyce has been conducting town hall-style meetings at least once a month so far this year in a bid to maintain morale. “When our transformation program is complete, this will be one of the biggest turnarounds of any Australian business ever,” has been his constant refrain.

While he has publicly acknowledged at these forums that morale was down, he claimed that the engagement of the workforce was still high because everyone wanted the airline to succeed.

The constant criticism of his strategy has also taken some personal toll on Joyce. Some have claimed he has developed something of a glass jaw.

He had a falling out with former Qantas boss, mentor and good friend Geoff Dixon over the latter’s involvement in a potential private equity bid for the airline.

Joyce lost one of the airline’s brightest and most talented executives when the CEO of Qantas’s low cost offshoot Jetstar, Bruce Buchanan, resigned suddenly 2½ years ago.

Buchanan quit to pursue his own business interests, but disagreed with Joyce and the board on the group’s strategy. They remain friends and still catch up for dinner several times a year.

Joyce also fell out with the billionaire Fox family over the decision by Jetstar to downgrade its use of the Fox’s Avalon Airport outside Melbourne.

Fox has publicly criticised Joyce’s decision to do a joint venture with powerhouse Middle Eastern carrier Emirates.

“I think it is a bit of a tragedy, when you consider that Qantas was one of the dominant airlines in the world a few years ago,’’ he has said. Fox’s Linfox Group now flies Virgin domestically and Etihad (Fox is mates with Etihad chief executive James Hogan) internationally.

Over the past six years, Joyce has also been reminded of his own mortality. Three years ago he had a brush with aggressive prostate cancer several months before he infamously grounded the airline in an act that led to him and some key staff receiving death threats. On the cancer front, he now has the all clear. But Joyce has never been one to shirk responsibility.

“You always know that buck stops with the CEO and you have ultimate accountability, and that’s the way it should be,’’ he has said.

His keen Gaelic sense of humour, a legacy of his working-class roots in the outer Dublin suburb of Tallaght, has also never been far away.

After the Qantas AGM last month at Melbourne’s Exhibition Centre, Joyce stayed on for a good hour afterwards patiently answering questions from shareholders and cracking the odd joke or two. One even asked him to pose for a photo with him.

When The Australian came across Joyce by chance at Neil Perry’s signature Spice Temple restaurant on a Wednesday evening in Sydney late last month, he was all smiles as he enjoyed a glass of wine with an old friend from his days in Irish aviation.

Certainly, things are looking up in Alan Joyce’s world and those of his chairman. The focus has now turned to Clifford, and whether the turnaround has paved the way for him to step down over the next year or two.

The view in the industry is that he will now go before his CEO.

Joyce and Clifford are both keen to stress that the airline is ‘‘not out of the woods’’. But the path to making good money again is now clear.